HOR - Accounting for Changes in the Homeownership Rate...

Accounting for Changes in the HomeownershipRate∗Matthew ChambersDepartment of EconomicsTowson UniversityTowson, Maryland 21252Carlos GarrigaDepartment of EconomicsFlorida State UniversityTallahassee, Florida 32306Don E. SchlagenhaufDepartment of EconomicsFlorida State UniversityTallahassee, Florida 32306January 2005(First version: June 2004)AbstractAfter 40 years of being relatively constant, the homeownershiprate- a target for housing policy- has steadily increased since 1995.This paper attempts to understand why the homeownership rate hasbeen increasing by constructing a quantitative model and then usingthis model to evaluate explanations that have been ofered to accountfor this increase. Wefnd that the increase in the homeownershipcan be explained by innovations in the mortgage market that allowshouseholds to take a positive housing investment position with a muchsmaller downpayment.∗We acknowledge the useful comments from David Marshall, Ed Prescott, and EricYoung. and seminar participants at Iowa State University, SUNY at Stony Brook, Uni-versity of Virginia, and the University of Tokyo. A version of this paper was presented atthe 2004 Annual Meetings of the Society for Economic Dynamics. We are grateful to thefnancial support of Generalitat de Catalunya through grant SGR01-00029 and Ministe-rio de Ciencia y Tecnología through grant SEC2003-06080. Corresponding author: DonSchlagenhauf, Department of Economics, Florida State University, 246 Bellamy Building,Tallahassee, FL 32306-2180. E-mail: dschlage@mailer.fsu.edu. Tel.: 850-644-3817. Fax:850-644-4535.1

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1IntroductionThe purchase of a house is the largest single consumer transaction for mosthouseholds. This should not be a surprising fact given that housing policyin the United States has been directed toward enhancing homeownership.Mortgage interest payments and property taxes are deductible for individu-als who itemize their personal income taxes. In addition, servicefows fromowner occupied housing are not taxed. The government plays an active rolein the mortgage market through Government Sponsored Agencies such asFannie Mae and Freddie Mac as well as various programs that subsidizethe entry costs for individuals who want to buy a house for theFrst time.1Given the focus of policy on the homeownership rate, we present the timeseries of this rate since 1965 in Figure 1.Figure 1: The Evolution of the Homeownership Rate19651970197519801985199019952000455055606570758085TimeHomewnrshipRat1995 Average Period = 64.5 Two important facts seem apparent in this Figure. Until 1995, the home-ownership rate seems to be stationary around 64 percent. After 1995, the1For example, the Bush Administration sponsored the American Dream DownpaymentAct which provides downpayment assistance, and has proposed a Zero-DownpaymentInitiative for Federal Housing Administration (FHA) insured single-family mortgages forFrst time buyers.

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